Results

• CIMB Niaga posted 2QFY15 net profit of Rp93bn (+12% qoq; -91.9% yoy) took 1HFY15 net profit to Rp176bn (-91%) or only accounted for 5.3% of street estimate.

Deviation

• It has forewarned 2Q provision will remained elevated (albeit slightly lower sequentially) which will impact earnings. Moreover, soft economy also impacted earnings.

Highlights

• Slower economic growth in 1H may flow through 2H but provision will be lower (gradual qoq improvement). Continued healthy loans growth and growth in NII and NOII, partly offset by lower NIM (sub 5%) and MSS cost in 3Q. Overall, FY15 earnings are expected to be lower than FY14 (albeit provision already started to jump since 2QFY14). The magnitude of decline could only be determined later.

• MSS was completed in Jul, hence, the Rp500bn one-off cost would be recognized in 3Q. The subsequent annual cost saving of Rp400bn will gradually filter through in 3Q and 4Q with the full impact in FY16. Exploring other cost initiatives to further contain overheads but still early days to provide any indications.

• Although gross NPL has jumped to 4.28% (vs. 4.07%) with emergence of new NPLs in energy and manufacturing sectors, it is targeting 4% or lower by year end. This is premised on loans growth and write-offs.

• Moreover, it has undertook aggressive stress testing (for example, stress test oil price assumption was lower than current level ) and provisioning while the new emergence is in segment with much lower exposure (O&G less than 3% of total loans) vis-à-vis coal. The latter’s NPL is rel ati vely stable at 43% vs. 40% in 1Q while coverage has increased to 70% vs. 60% in 1Q.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and impact on non-interest income when there is a slowdown in capital markets.

Forecasts

• Unchanged, pendi ng CIMB Group’s 2QFY15 results scheduled for 28 Aug with downward bias for FY15. Nevertheless, post cost down of circa RM500m per annum (from IB rationalization as well as MSS in Malaysia and Indonesia), more pertinent would be earnings prospects for FY16 and beyond.

Rating

HOLD

Positives

• - Proxy to economic growth and capital markets as well as growing regional universal bank platform, new core banking system (1Platform) and new T18 initiatives.

Negatives

• Impact on non-interest income when capital markets soften, impact of asset quality deterioration in Indonesia and legacy high cost structure.

Valuation

• Target price maintained at RM6.02 based on Gordon Growth with ROE of 11% and WACC of 10%.

Source: Hong Leong Investment Bank Research - 3 Aug 2015